–Mortgage Defaults:Joshua Abel, Joseph Tracy and Joshua Wright of the New York Fed look at how refinancing can reduce the risk of mortgage defaults. “In our new research, we examine a sample of over 173,000 prime ARMs originated since 2003. In total, we have over 6.5 million monthly observations on these mortgages. We control for a number of other factors that may determine a borrower’s default risk (again measured as a borrower becoming ninety days delinquent), including the origination credit (FICO) score, the updated LTV, the local unemployment rate, and the prior twelve-month change in house prices. Focusing on borrowers with an updated LTV of 80 or higher who would be candidates for refinancing under the HARP program, we find that a 26 percent reduction in the monthly mortgage payment (our estimate of the average reduction for a HARP refinancing) would result in a 3.8 percentage point reduction in the five-year cumulative default rate. Combining this with an estimate of the likely losses given a default on these mortgages, our results indicate that borrowers who refinance under HARP have an estimated reduction in projected credit losses of 134 basis points. This implies that for every billion dollars in agency mortgage balances that refinance through an improved HARP, the estimated reduction in credit losses would be $134 million. This reduction would primarily benefit taxpayers, although private insurers of the underlying mortgages would also receive some benefit.”

–Oil Prices and Growth:Jeff Rubin looks how high oil prices could cap economic growth. “For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies. The countries guzzling the most oil are taking the biggest hits to potential economic growth. That’s sobering news for the U.S., which consumes almost a fifth of the oil used in the world every day. Not long ago, when oil was $20 a barrel, the U.S. was the locomotive of global economic growth; the federal government was running budget surpluses; the jobless rate at the beginning of the last decade was at a 40-year low. Now, growth is stalled, the deficit is more than $1 trillion and almost 13 million Americans are unemployed.”

–Richard Fisher:Scott Sumner criticizes Dallas Fed President Richard Fisher’s views on monetary policy. “To get serious for a moment, despite all the snark it’s obviously true that Fisher might be right and I might be wrong. But here’s what seems beyond dispute: Fisher’s been way off base since 2008, almost continually arguing for tighter money and the dangers of inflation, even as we experienced the lowest inflation since the mid-1950s, and the slowest NGDP growth since the early 1930s. I’d have more respect for him if he was a bit more humble, admitting that he had been repeatedly wrong over the past 4 1/2 years. But I saw no sign of such introspection in this bold speech. Just a desire to push full speed ahead with tight money, even as there are numerous signs of a potentially disastrous slowdown in global demand. Bold and powerful? Yes. Wise? Not even close.”

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